When a Natural Disaster Strikes, Is Your Association Covered?

Hurricanes. Floods. Tornadoes. Hail. Wildfires. Lightning strikes. Earthquakes. Blizzards. Mother Nature has quite the arsenal to throw at us! Unfortunately, every part of North America is subject to one or more of these events. Some, like hurricanes, come with enough advance warning to prepare for them, but most do not. That’s why it is critical to the financial health of your community association to have the proper insurance coverage in place.
 
What are the risks if your community association isn’t appropriately covered? There are several possible outcomes, although, none of them are good. The financial repercussions to your association’s operating budget are the greatest issue. Without adequate insurance, your community may not be able to rebuild. Homeowners will face special assessments to cover the gap, which may lead to friction in the community and erode homeowners’ trust for the board. In a high-rise community, the association’s lack of insurance can cost people their homes. Homeowners can also sue the board for not having the correct insurance in place.
 
Insurance is complicated, and it can involve a lot of red tape. Having an insurance broker you trust, is important in making sure your association is adequately covered. That broker must also be knowledgeable about your community and its assets, as well as the most common risks for your area. Additionally, it is essential your broker is up-to-date on all applicable state requirements and regulations.
 
We sat down with several experienced insurance professionals across North America and asked them about natural disasters and insurance—what you need to know, and what are commonly missed or misunderstood facts about insurance coverage.
 
Our expert panel included

• Katherine Beltran, product manager, FS Insurance Brokers, Dania Beach, Florida 
• Jack Colson, product manager, FirstService Financial, Insurance & Banking, Altamonte Springs, Florida
• Jamie George, vice president, FS Insurance Brokers, West Region 
• Sean Kent, vice president, FS Insurance Brokers, East Region   
• John Lee, vice president of cash management & insurance, FirstService Financial, South Region 
• Pamela Malfavon, product manager, FirstService Financial, South Region
• Pat Schettino, director of national property programs, FirstService Financial, Toronto, Ontario

 
Q: What are the most commonly misunderstood things about insurance coverage?

• Beltran: “People think that ‘all-risk’ means nothing will be excluded from the policy. That’s never the case.”
• Schettino: “Condo owners don’t always understand that they need their own policies. Property insured under a master association policy includes the common areas and property owned by the condominium corporation. Boards should routinely remind unit owners to purchase their own unit coverage.”
• Lee: “Deductible awareness! Many boards know the price of the policy but do not realize what their true exposure is because they have a high deductible in exchange for a lower premium.”
• George: “Boards often don’t have enough coverage. I think a lot of condos go with the basic coverage and they don’t realize what this actually covers. Also, homeowners associations (HOAs) and single-family boards typically do not understand they do not have wind coverage for trees, shrubs and outdoor natural property.”
• Kent: “Not all policies are the same. Insurance is viewed as a commodity, but carriers and the policies they issue can vary widely.”
• Malfavon: “It’s important to have an accurate value of the building on the policy. The association can be penalized for being under-insured.”

 
Q. What should all board members and association members know about insurance policies as it relates to natural disaster coverage?

• Schettino: “Plan ahead and ensure that the corporation has enough reserves to cover the deductible in the event of a catastrophe. Also, insure to the appraised property value so the association doesn’t incur a co-insurance penalty.”
• Beltran: “Different natural disasters come with different deductibles. A hurricane or a flood may have a different deductible than other perils such as fire.”
• Lee: “Most catastrophic coverage has huge deductibles and associations don’t have the cash reserves to cover them. They should be aware of the financial resources they will have access to in the event of an emergency and plan accordingly. This includes the coverage in the unit owners’ homeowner policies, which may pay toward any special assessment.”
• Malfavon: “Know how deductibles apply and how often. Is the deductible based on all claims in a calendar year or does it apply to each occurrence? Does the percentage deductible apply to tropical storms or to hurricanes only?”
• Kent: “Some of the things we look at include the coverage limits for wind, hail, flood and earthquake. Those are the four big ones. We look at policy limits and deductible structure. There’s a percentage deductible and a dollar deductible. The larger the deductible you have, the more you’re going to save on premiums, but in the event of a disaster, associations need to make sure that they budgeted appropriately for the deductible.”
• George: “That typically earthquake/earth movement and flood are not covered perils. In the event of a large quake, if the association is not properly covered they face total disaster and loss.”

 
Q. What loopholes or special requirements may be found in coverage? E.g., in Florida, not only do you need hurricane insurance, you also need flood insurance.

• Kent: “There’s named-storm coverage for hurricanes and tropical storms. Everyone should have wind coverage. Most disaster conditions are included in a policy unless they are specifically excluded. In most places, wind and hail are included. But in Virginia, for example, you may have a separate wind and hail policy. A snowstorm may fall under wind coverage, and possibly collapse if the weight of accumulated snow causes a roof to cave in. Collapse is included in most policies. You must also, as soon as it’s safe, take steps to mitigate further damage: place tarps on roofs, boards over windows, etc., or your insurance company may not pay all of the claim.”
• George: “Boards should make sure they have wind coverage in Texas and earthquake and flood in the west. Lenders do not require earthquake coverage in the west and it’s a shame, because it really is necessary.”
• Lee: “There are several potential loopholes worth discussing. The most common is unit owners believing they do not need their own insurance, because the association carries insurance. The second is the need for flood insurance in addition to property coverage. Last, the misnomer that the association carries an “all perils” policy. There is no such thing!”
• Beltran: “Flood is a separate policy and it’s an extremely important coverage as we are all at risk of losses because of a flood. It is important to understand the number of things covered because there are always exceptions in any insurance policy! For example, during a hurricane, damages caused by water that comes in due to a broken window will be covered by the hurricane policy; water that comes in under a door because the canal overflowed will be covered by the flood policy even though it was caused by the storm.”
• Schettino: “Most insurance policies are all-risk except for the exclusions. The board needs to be aware of what these exclusions are. Each market has its own different types of catastrophic losses that may be insured on separate policies. This is when having an expert to turn to is important.”

 
Q. Are there stipulations your association must meet at all times to be eligible for coverage?

• Colson: “In the state of Florida, there are statutory limits that must be met. And you can’t buy insurance after the storm is announced.”
• Schettino: “Each insurance company is different, but most do building inspections to ensure adequate coverage. For example, sprinkler system valves cannot be turned off and smoke alarms must work. It’s also important to pay premiums on time to reduce the risk of the insurance company canceling coverage midterm.”
• Beltran: “Every policy is different and needs to be reviewed with your agent, but compliance with safety regulations and local laws is important. Information on the application must also be accurate; otherwise, coverage could be denied based on false information.”
• George: “In some cases, a reserve study may be required, but documentation of the claims on your policies and an acceptable loss history are key.
• Malfavon: “You may need to provide a current appraisal or an appraisal that was done within the last three years.”

 
Q:  What can associations do to get a break on policy premiums?

• Beltran: “Properly installed smoke and security alarms, shutters, safety protocols – anything that will decrease the likelihood of a loss – may help reduce premiums.”
• Schettino: “Buildings can be underwritten differently and those with better protection can obtain rate credits. This would be up to the discretion of the underwriter.”
• Lee: “Properly identified mitigation features can reduce policy premiums. These include the type of roof attachments and hurricane impact windows in Florida.”
• George: “In Texas, associations can reduce their hurricane and wind coverage premiums by installing impact glass.”
• Malfavon: “The association can obtain significant credits on the premium based on a wind mitigation form and what the property has done to mitigate their exposure (impact glass, roof coverings, secondary water resistance, etc.).”
• Kent: “The more unit owners who buy their own coverage, the better off the association will be. It all comes down to loss experience – the frequency of claims and the dollar amounts paid out for the claims. The lower your frequency and the lower the dollar amount, the lower your premiums will be. The more homeowners who buy HO-6 coverage, the better the association’s premiums will be.”

 
Q: How do I know if I have the right coverage? Where do I go? Who do I ask? 

• Schettino: “A professional, licensed insurance broker is the person to go to. The broker has a duty to consider the best interest of the client first and is an expert in the field.”
• Beltran: “Call us, FirstService Financial! We are subject matter experts at the fingertips of all FirstService Residential clients. We have the expertise and the tools to guide associations accordingly.”

Disasters happen. Having the right insurance in place is critical to mitigate risk, protect your association’s operating budget and recover from a disaster. Inadequate insurance can result in delayed repairs, unnecessary special assessments and liability lawsuits. An experienced, knowledgeable insurance broker can review your policies and recommend the best coverage to protect your association.
 
To learn more about how FirstService Residential, North America’s leading property management company, can connect you with the right experts to guide your insurance coverage decisions, contact FirstService Residential today.